National Self Storage Research Report
National Report, Second Half 2017
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Cycle Nearing Maturity as Construction Pressures Fundamentals
Market displays resiliency, toughness amid wave of new development. Underlying demand for storage space continues to strengthen as healthy job growth, rising wag-es and the formation of new households sup-port the need for self-storage. The industry is currently in a period of transition, moving from a pace of rampant expansion to a more moderate, sustainable growth level. Though demand remains robust, elevated construction activity is creating pockets of risk with completions on pace to reach record levels in some markets. Concentrations of construction are aligning with job creation, particularly in Dallas, Phoenix, Nashville, South Florida, Denver, Portland, Raleigh and Charlotte. These metros feature growing populations, healthy economies and more affordable land, making them prime targets for expansion. As new facilities open, fundamentals may falter. Vacancy is forecast to increase nationwide for the first time since the recession and rent growth is tepid. Certain pockets of increased supply risk do exist and development-heavy submarkets with an outsize supply-demand imbalance may encounter significant headwinds. Greater concession usage, lower occupancy and negative rent growth may become the new norm for areas facing oversaturation. On the whole, however, the market remains intact, displaying resiliency and durability. A year ago, many industry forecasts anticipated doom and gloom, but reality has proved to be more balanced than many analysts predicted.
Investors recalibrate in shifting market; buyer-seller disconnect broadens. A gap between buyer and seller pricing expectations persists through the first half of 2017 as property owners seek peak pricing. Buyers, meanwhile, have tempered their aggressiveness amid lower revenue growth projections and slipping REIT performance. This widening divide has reduced the number of transactions and extended closing times, particularly in the early part of 2017. Uncertainty stemming from a new presidential administration, an influx of new supply and negative self-storage REIT returns caused many private clients to forgo making buying or selling decisions until they have stronger clarity on this new investment environment. Advancing into the second half of 2017, buyers appear ready to reengage, with a noticeable upswing in interest. With REITs moving to the sidelines, regional groups and private clients have an opportunity to acquire institutional-grade properties that may have otherwise been unavailable. Moving forward, stabilized assets with quality underwriting based on current incomes will receive considerable investor attention while pro forma deals predicated on substantial future revenue growth may prove difficult to close.